The proposed Inheritance Tax exemption for emergency services personnel
A Great Relief
Tucked away in paragraph 2.89 of H M Treasury’s Budget 2014 report was a proposal to extend the existing IHT death on active service exemption for members of the armed forces to embrace members of the emergency services too.
The full paragraph is set out in Box 1. HMRC published a consultation paper (CP) on this proposal on 23rd July 2014. The consultation closes at noon on 15th October 2014. HMRC proposes that draft legislation will be published at the Autumn statement 2014, to be retrospectively effective from 19th March 2014.
The existing exemption is not an academic relief rarely encountered in practice. The main problem is that the wide scope of the exemption is not appreciated and the relief is not promoted by all professional advisers. Money Management was one of the first professional journals to draw attention to the relief in an article published in February 2006 (IHT –a complete exemption).
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With IHT anticipated to affect about 10% of the population, coupled with the current push by HMRC to maximise tax receipts, the existing exemption is a standard bearer for what is morally right. Taking part in warfare can have a profound effect on the participant’s remaining life. I recall in the mid 1980s visiting a married couple in their late 80s. The husband had a deformed forearm and I asked him what had happened. He replied “That was in the trenches in the First War. If I had to go through that again I would do myself in.” He then changed the subject.
The existing relief
The current relief is a complete exemption from IHT for members of the armed forces “or certain associated services” whose death was caused by an injury or disease received or aggravated while he or she was on active service. This summary of the statutory relief gives a clear (but wrong) impression that a direct connection needs to exist between the wound or disease and death.
In 1979 the Duke of Westminster case made clear that the causal connection between the wound or disease and death does not have to be a direct one. In that successful appeal for a judicial review of the MOD’s refusal to grant the appropriate certificate, Mr Justice May concluded that on a proper construction of the statutory provision a person “died from the wound”, if-
“..in consequence of the wound he died earlier than he would have done had he not sustained the wound, even though the wound was not the direct or an ascertainable cause of his death.”
The case also contains an often quoted hypothetical example –
“..if a member of the armed forces on active service sustains a wound to the lung which requires the removal of that lung, this in no way directly affects the heart. But if then, in the fullness of time, because that man only has one lung, in the course of his life its absence places excessive strain on his heart, so that he dies earlier than he would have done had he had two lungs (then the exemption should apply).”
The exemption is obtained by applying to the MOD for an appropriate certificate. The MOD requests a copy of the death certificate and full medical records. If the certificate is issued by the MOD then the production of that certificate to HMRC should secure the IHT relief.
The human cost
There can be a lack of appreciation of what the injured person has endured. It is hardly ever a simple case of suffering a wound or disease, recovering and then dying, often many years later. Combatants usually do not discuss their wartime experiences. Most combatants can be scarred in some way and, akin to a chronic illness, periodically that scarring will flare up. A missing limb, embedded bomb fragments or a healed gunshot wound can cause continual medical difficulties. Anyone interned in any form of prison camp is likely to have been harmed in some way.
The IHT exemption is Society’s way of saying “Thank you.” That thanks should be delivered in a gracious and, if needed, generous manner. There are indications that this humane approach can be absent in some cases and this needs to be addressed when considering the existing and the proposed new relief.
The use of the relief
HMRC answered a FOI request in November 2010 as to the number of cases in the preceding ten years where the MOD had issued a certificate and IHT relief was granted. The number was just under 65 cases. Interestingly the figures were broken down into age groups and the largest group was between the ages of 80 to 90 where the number of IHT relieved cases was 30. To help keep the relief in mind, a short checklist is set out in Box 2.
A checklist for advisers
- Be aware of the extent of the relief; particularly that there does not have to be a direct link between the wound or disease and death.
- Was your client or any spouse or civil partner ever in the armed forces or emergency services or in any other capacity (eg as a journalist) and did that client experience any armed conflict or active service. Note for pre 1953 service merely being under military discipline may suffice.
- Has there ever been a health problem that can be associated with this service?
- Brief the client and (with the client’s consent) the spouse/civil partner about the relief.
- Ask the client to detail in writing the history of service and health, signing and dating the bottom of each page. Update that history regularly.
- Ask the client to brief his or her doctor and proposed executors about the health problem and the IHT relief. The object should be to ensure that on death the death certificate fully records the link if reasonably feasible to do so.
The current relief – some problems
The Consultation Paper states that “the existing legislation works well for members of the armed forces and is well understood so we do not propose any major change to this. However if there is evidence that the exemption can be amended to work more effectively within the aims we will consider this.”
The paper proposes an end to the problem that s154 granted no relief on any lifetime gifts caught for (or for more) IHT on death, but the following problems with the relief are not addressed in the CP.
The first difficulty is that, if granted, the relief is not transferable between spouses or civil partners. So families are in a position akin to that of married couples/civil partners before their nil rate band became transferable on death. If the relief is available on the first death and if that dying spouse wanted everything to go to the surviving spouse, the relief has to be kept alive by using a trust in the will or by a deed of variation.
2.89 IHT exemption for emergency services personnel
The government will consult on extending the existing IHT exemption for members of the armed forces whose death is caused or hastened by injury while on active service to members of the emergency services (Finance Bill 2015)
The solution to this problem is to make the relief on death transferable to a surviving spouse or civil partner: and automatically so, without any need to claim the relief at that time. There can be circumstances where there is some existing IHT mitigation due to the availability of two nil rate bands on the survivor’s death: the availability of a death on active service exemption applying on the first death means that the nil rate band cannot be used on that death.
Whilst there is no time limit on claiming the relief from the MOD, there is a time limit imposed by the tax legislation on claiming the death on active service relief to obtain a refund of IHT that has been paid. This time limit can be overlooked because the deceased’s family and very often their professional advisers were unaware that the relief might apply. The time limit used to be six years from the date when the last payment of IHT was paid; it is now four years. Why have a time limit at all for this exemption?
It would be reasonable for no interest to be paid on refunded IHT in these circumstances, but the current relief is being missed by some professional advisers. Once the time limit for repayment expires whilst the certificate can still be obtained from the MOD, HMRC will refuse repayment. The only remaining legal remedy is to contemplate legal proceedings for negligence against the original advisers. Is this in the spirit of this exceptional relief?
The third problem area is the way some decisions are made by the MOD. There was a recent case where a young man in 1942 was in a restricted dockland area the day after a German bombing raid and was ordered to sweep up “clouds” of asbestos. Asbestosis was a cause of death, but the relief was refused on the grounds that the man was not a member of the armed forces, contrary to what during his lifetime the man indicated was the case. So why was he admitted to a restricted area to undertake this dangerous work? There is a need for the independent panel of experts who make the decision to be accountable to a simple appeals system before which a claimant would not need legal representation. The CP asks for input on which should be the administering body for granting the new relief: there is a good argument that this should also be the MOD, but with a new appeal process to try to avoid the expense of a judicial review.
The fourth problem is the limitation arising from the definition of “active service.” There are different definitions pre and post 1953: pre 1953 being under military discipline is the qualification, but not all service personnel appear to be covered by that relief. For military service post 1953 particularly excluded are service personnel dying as a result of training exercises while not on active service.
In 2012 David Hanson MP raised in Parliament the case of a constituent, Nigel Thomas, who died as a result of radiation exposure whilst serving between 1980 and 2004 as a pilot in the RAF. Mr Thomas suffered the radiation exposure as a result of “an accident” whilst stationed in Cyprus between 1989 and 1992 during the Gulf War. The relief was refused even though Mr Thomas was awarded the Gulf War medal. The MOD considered Mr Thomas was in a support role and, not being on the front line, the MOD decided “the condition was not sustained by service of a warlike nature.” In presenting his case on behalf of Mr Thomas’ family, Mr Hanson suggested that “service” (not “active service”) should be sufficient to qualify for the relief.
The final area of uncertainty is the approach of HMRC. The IHT Manual published on HMRC’s website contains a clear indication that HMRC in some circumstances would challenge the validity of a certificate issued by the MOD. For example, Paragraph 11293 of the Manual directs the member of HMRC dealing with the estate to refer the certificate issued by the MOD to HMRC’s technical group in three circumstances, the last being “where the information on the file suggests that the deceased died 10 or more years after the injury or disease mentioned in the certificate.”
This is not the only time that a reference is made to referral to technical group. It seems nonsensical that effectively taxpayers’ money could be used for one Government department to challenge the decision of another department – and also very petty bearing in mind the purpose of this relief.
The proposed extension of the relief
The extension of the existing IHT relief to members of the emergency services is emotionally appealing but problematical. The CP does not try to replicate the equivalent of “active service” but suggests that the relief be available for members of the emergency services “whose death has been caused directly or hastened by an injury sustained while responding to emergency circumstances.” There is a proposed definition of “emergency circumstances“ – “if they are present or imminent and are causing or likely to cause or appear likely to cause”… death, injury, harm etc.
This narrow focus seems unlikely to cover, for example a police officer, peacefully patrolling, who has a brick dropped on his or her head simply because he or she is a police officer. It arguably would also not cover the case of the two female police officers killed in Manchester in September 2012 by bullets and shrapnel when they were lured into an ambush, responding to what was described as “a routine incident” of a burglary report.
Instead of considering the circumstances existing at the time the disease/injury was sustained, it would be much more in the spirit of the proposal to grant the relief to anyone who was a member of the armed forces or emergency services who sustained a disease/injury whilst carrying out their duties, whether or not formally “on duty” – to cover for example police officers who are never really off duty. This takes up the proposal made by David Hanson MP and would cover soldiers dying on training exercises and, for the future, reverse cases like those of RAF officer, Nigel Thomas, mentioned above.
The forward to the CP by David Gauke MP, Financial Secretary to the Treasury, states “It is not right that those risking their lives protecting us pay inheritance tax and I look forward to recognising this in law.”
The final question is should the relief be restricted at all? What of the case of a member of the public who “has a go” to try to make an arrest or to prevent a suicide bomber exploding and is killed or wounded? Is there any significant difference between an on or off duty police officer and a member of the public being blown apart by a terrorist bomb whilst sitting on a bus or in a tube train? With IHT becoming a mainstream tax, there is a strong case for the simplification and extension of this relief to respond to the realities of today’s world.
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